New rules proposed for distribution network prices

28 August 2014

The Australian Energy Market Commission today called for submissions on draft rules to change how distribution networks charge consumers for electricity.

Releasing the draft determination on proposals to amend distribution network pricing arrangements in the National Electricity Rules, AEMC Chairman John Pierce said the new rules would enable consumers to make more informed decisions about how they use energy services.

“There are differences between how individual consumers choose to use electricity, due in part to new technology and changes in the way we live. The way consumers are charged for electricity has not kept pace with these changes.

Under current price structures, all consumers pay the same network prices based on fixed charges and the volume of electricity consumed, regardless of how or when they are using power. Network prices are responsible for about 50 per cent of the electricity prices paid by residential consumers on average across Australia, and a key driver of these costs is peak demand.

“Existing network prices over-recover revenue for off-peak use of the network and under-recover for peak use. This means consumers who use most of their energy at off-peak times are paying more than it costs to supply network services to them - while those using energy at peak times are paying less than it costs.

“The amount of electricity used by individual households at different times of the day can vary enormously depending on the various appliances and technologies being used from home to home,” he said.

“But consumers aren’t being given the option of reducing their peak demand to save money, or continuing to use electricity at those times when the value they place on that use outweighs the costs.”

The AEMC draft determination details the impacts of different types of energy use patterns on network prices. Examples include:

  • A consumer using a large 5kW air-conditioner in peak times will cause about $1,000 a year in additional network costs compared with a similar consumer without an air-conditioner, but the consumer with the air-conditioner pays about an extra $300 under the most common network prices. The remaining $700 is recovered from all other consumers through higher network charges.
  • A consumer using an average-size north-facing solar PV system will save themselves about $200 a year in network charges compared with a similar consumer without solar. Because most of the solar energy is generated at non-peak periods during the day, it reduces the network’s costs by $80, leaving other consumers to make up the $120 shortfall through higher charges.

The majority of consumers are expected to benefit from these changes through lower network prices in the medium to longer term. Some consumers would choose to respond to new network price structures by reducing their use of the network at peak times, which will reduce overall network costs. Those cost savings would be passed on to all consumers through lower future network charges.

Analysis undertaken for the AEMC estimates that up to 81% of consumers would face lower network charges in the medium term under a cost-reflective capacity price and up to 69% would see lower charges under a critical peak price.

Mr Pierce said that while different technologies impact network use in different ways, the rules should be flexible enough to result in efficient outcomes regardless of the technology being used.

“We are focussed on establishing the right regulatory regime for the future so everyone can make clearly informed decisions about their energy use as new technologies emerge.”

Under the proposed rule change, consumers would have clearer incentives to consider how, when and where they use energy.

The new approach to structuring network prices would help people see the value of different choices such as:

  • Investing in more efficient appliances or new technologies that can help manage their energy use at peak times
  • Installing solar panels that point west so they can generate more energy at peak times
  • Investing in batteries to go with their solar panels
  • Choosing to locate their business in an area where network costs are lower.

The proposed changes would be introduced over the long-term. Network businesses will be required to minimise the impacts of price changes on consumers, for example by gradually transitioning consumers to new prices over 5 years or more if necessary to avoid sudden price changes.

Mr Pierce said network prices would continue to be developed by the networks with oversight from the Australian Energy Regulator, but under the proposed new rules consumers would have greater influence on the decisions made and the prices they pay.

There will be more consultation with consumers and retailers when networks develop their prices and the process for setting prices will be more transparent. Network prices will be finalised earlier, giving consumers and retailers more time to prepare for price changes.

The AEMC has consulted extensively with industry and consumers in the development of the draft determination. Further consultation will occur before a final decision is made in late November this year. Network businesses would need to start consulting on the development of new tariffs and submit draft proposals to the AER in mid-2015 for new prices to be phased in from 2017.

For information contact:

AEMC Chairman, John Pierce (02) 8296 7800

Media: Communication Manager, Prudence Anderson 0404 821 935 or (02) 8296 7817

 

28 August 2014